Tuesday, July 3, 2007

Energy Costs Highest Since 1987

Kilowatts, gallons — they all add up. Energy is now sucking money out of Americans' bank accounts at a record level — hitting $612 billion at an annual rate in the month of April, the last month of data. Over the past two years, energy bills as a share of income have risen and are now at their highest point since 1987, but still below the levels of the 1970s and early 1980s. For low-income households, some economists estimate energy consumption as a percentage of income is closing in on 10 percent.

I've written a fair amount about gas prices for several reasons.

1.) Consumers see gas prices at least once a week if not more. As a result, these prices have a tremendous impact on consumer sentiment and spending habits.

2.) Despite the Federal Reserve's love of core inflation, total inflation is what consumers see on a regular basis. Energy and food prices are prices that have the most impact on consumer's inflation expectations.

3.) As fuel prices increase, discretionary income for other items decreases. This will have an impact on retail sales and other consumer purchases.

4.) I would argue there is a gradual inflection point with energy prices. At some point, energy prices will hit a level where consumer sentiment and spending take a disproportionate hit. I don't know what that level is, but I would guess it would start at about the $3.25/gallon area.